Earnings Call: Q1 2021

May 3, 2021

Earnings release

At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. Before turning the meeting over to management, Please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Monday, May 3, 2021. I will now turn the call over to Eric Glashon, President and CEO. Please go ahead. Good afternoon, ladies and gentlemen, and thank you for your patience during our technical difficulties. I'm here with Silvana Travalini, Chief Financial Officer of Stella Jones. Thank you for joining us for the discussion on the financial and operating results for Stellozone's Q1 ended March 31, 2021. Our press release reporting Q1 results was published earlier this morning. It along with our MD and A can be found on our website at www.stellazones.com and has been posted on SEDAR today as well. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Today, we reported all time record first quarter sales of $623,000,000 up 23% year over year and EBITDA of $99,000,000 We had an exceptionally robust start to the year fueled By record pricing and volume gains in the residential lumber product category and by our ability to adapt to the unprecedented lumber market conditions and capitalize on our extensive procurement network and source of supply to deliver strong results. Our results this quarter also benefited from a solid performance in our utility pole category and strong railway high demand tempered by pricing pressures in the Non Class 1 business. In anticipation of continued solid demand in all three of our core product categories, we used our strong balance sheet in Q1 to invest in working capital and in our network. Subsequent to quarter end, we also secured additional liquidity to enhance our financial flexibility for growth opportunities as we look to drive continued creation of value for shareholders. I would like to take this opportunity to thank our employees for their commitment in achieving exceptional first quarter results and our suppliers and customers for their continued collaboration and support. I will now provide you a brief overview of our Q1 results. Sales for the Q1 of 2021 amounted to $623,000,000 up from sales of $508,000,000 for the same period in 2020. Excluding the negative impact of currency conversion, Pressure treated wood sales rose $102,000,000 while sales for lofts and lumber increased by $36,000,000 Utility pole sales amounted to $206,000,000 in line with the same strong Q1 sales last year. Most of the sales increase was driven by upward price adjustments in response to raw material cost increases and a favorable sales mix, including the impact of greater fire resistant wrap pull sales volume. Overall volumes were relatively unchanged compared to Q1 as more project related volume this quarter was offset by lower maintenance demand, particularly in the U. S. Southeast due to the extreme winter weather conditions. Railway pipe sales were $158,000,000 down 8% compared to sales of $172,000,000 for the same period last here. Railway product sales decreased organically by $6,000,000 or 3%. The overall increase in volume this quarter was more than offset by lower pricing, largely due to non Class 1 business. Pricing headwinds and an unfavorable product explained most of the reduction in the sales price for non Class 1 business, while some downward pricing adjustments in response to lower fiber costs unfavorably impacted pricing for Class 1 customers. Residential lumber sales rose to $166,000,000 up 134% from $71,000,000 for the same period in 2020. This significant increase was largely driven by the exceptional rise in the market price of lumber. We continue to benefit from strong demand, bolstered by an early start to the season for home improvement projects. Also, our ability to service our customers led to us winning a greater proportion of our customers' annual programs. Industrial product sales amounted to $28,000,000 largely in line with the $25,000,000 of sales generated a year ago. Our bridge sales were lower this quarter, mainly timing related, but were offset in large part by the increased activity and demand for pilots. The sales of logs and lumber, a product category used to optimize procurement totaled $65,000,000 more than double the sales of $29,000,000 generated in the same period last year. This increase is primarily due to the significant increase in the market price of lumber. Sylvana will now provide further details regarding our results Thank you, Eric, and good afternoon, everyone. Turning to profitability. Driven by strong sales growth, gross profit increased 35% this quarter to $112,000,000 compared to gross profit of $83,000,000 in the Q1 last year. Similarly, EBITDA and operating income rose 57 percent to $99,000,000 and 82 percent to $82,000,000 respectively. This first quarter record profitability stems from the high market price of lumber, the continued strong residential lumber demand and the company's ability to increase its market reach in residential lumber. Improved pricing for utility poles and volume gains for railway tons also contributed to higher profitability this quarter, where we're offset by the pricing pressures for the non class line railway ties business. As a result, net income for the Q1 doubled is $56,000,000 or $0.85 per share compared to $28,000,000 or $0.41 per share last year. Turning to liquidity and cash flow resources. Cash flow generated from operations before changes in non cash working capital components and interest and income tax paid was $100,000,000 in the Q1. The increase in working capital decreased liquidity by over $200,000,000 during the quarter, and this was largely due to the seasonal increase in working capital, the higher level of sales and the increased inventory costs stemming from the higher market price of lumber. During the quarter, we invested $14,000,000 in capital expenditures and returned capital to shareholders by buying back 800,000 shares for a total of $37,000,000 There are 1,400,000 shares remaining in the current normal course issuer bid program. As of March 31, 2021, Bella Joe's net debt, including $137,000,000 of short term debt, increased to $935,000,000 and the net debt to EBITDA ratio stood at a comfortable 2.2x. Subsequent to quarter end, We closed a US350 $1,000,000 senior unsecured credit facility, including a term loan facility of up US250 $1,000,000 and a revolving credit facility of US100 $1,000,000 This facility provides us with additional liquidity at very competitive rates to continue to execute our growth strategy. Yesterday, the Board of Directors of Sao Jones incurred a quarterly dividend of $0.18 per common share, payable on June 22, 2021 to shareholders of record at the close of business on June 1. 2021 will be the 17th consecutive year of dividend increases. I will now turn the call back to Erik for the outlook. Eric? Thank you, Saldanha. Based on the strong quarterly performance and the expectation that the higher levels of pricing for lumber will continue to favorably impact the profitability of the residential lumber product category during the seasonal peak demand period. We now expect EBITDA to be in the range of $450,000,000 to $480,000,000 This guidance anticipates headwinds of approximately $90,000,000 in sales from the deterioration of the value of the U. S. Dollar relative to the Canadian dollar. Excluding the currency conversion impact, we project sales growth to be ranging between 15% to the low 20 percent for 2021. We continue to expect utility pole sales to increase In the mid to high single digit range compared to 2020 as we project sustained growth in replacement demand, including an increase in the value added fire resistant wrap pull sales. While sales for railway ties and industrial products are projected to be relatively comparable to those generated in 2020. For residential lumber, we are now forecasting sales to increase in the range of 45% to 65% compared to 2020 and disciplined by the current trend of higher pricing, which is projected to continue during the peak demand season. Please consult our MD and A for a full list of economic and market assumptions used to prepare this guidance. As for our priorities for 2021, we intend to be active on the acquisition front, Focus on innovation, continue to improve our operating efficiency and expand our capacity to sustain our profitability. We recognize the importance to integrate environmental, social and governance considerations in key business decisions and strategies. We are focused on enhancing our ESG practices, developing better strategies to meet our goals and creating superior value for all our stakeholders. This concludes our prepared remarks. We will now be pleased to answer any questions you may Your first question comes from the line of Walter Spracklin with RBC Capital Markets. Please go ahead. Thanks very much. Good afternoon, everyone. Good afternoon, Walter. So I want to start in your Thai business. None of heard some of the potential consolidation that's happening, particularly with Kansas City Southern And Kansas City doing their own ties in house came up on one of the conference calls. I'm just wondering whether you think that's A threat or an opportunity? Is it an opportunity that should KCS be acquired that you could look to Purchase their Thai business or is it a threat in that whoever buys KCS may look to Maximize the use of that business line within KCS. Just curious your thoughts there, Eric. Thank you, Walter. I think it's an opportunity. So we are important suppliers to both the Canadian Natural and the Canadian Pacific, both of those entities, both of those companies, as you know, do not operate their own treating facility. I would believe that a consolidated group, either way, would probably lean more towards wanting to divest those assets. That being said, Stella Jones operates a facility that is online with the KCS, and We do actually supply certain requirements such as bridge timbers and certain tire requirements throughout the year to the KCS. So we are very well positioned to benefit yourself from this merger. Okay. Moving on staying with railway Ties for a moment. You mentioned that last quarter that you or I guess the quarter progressed relatively comparable top line level So, RelayTies, excluding ForEx, just curious whether that view for the top line is changed With your Q1 results here? Not at all. So we maintain our guidance for our Reliquide to be comparable year over year, and we base that off the fact that all our Class 1 customers had indicated similar Maintenance programs. And so although we're slightly behind after the Q1, it's simply a question of timing of orders. Okay. And like I asked on the last call, any reason why if there's been any possibility of deferral, they're probably doing it Given the amount of traffic and congestion, it sets up quite nicely for next year potentially if it was deferred To see some of that volume come in, in 2022, is that still the case? Well, yes. What's encouraging is that The major railroads in North America are posting great results. Traffic is increasing on the rail network, which means more usage. It will lead to more maintenance. Also very much optimistic about infrastructure spend in the next Year or 24 months in the U. S. Whenever that build comes through. So I think if you look beyond 2021, the future looks relatively encouraging for the real time business. Okay. And then last question here on your poles Side, mid to high single digit, it's been the run rate kind of came in, in that Q1 here now. Based on what you're seeing in terms of customer indications as we trend into the Q2 here, are you on pace? Would you say that that mid to high single digit ex ForEx for poles as well for this year? No, definitely. Lots of inquiries from Phil, the contractor side of the pool business, COVID has subsided to some extent in the U. S. We're seeing activities pick up. And just to remind also to the listeners that we do expect selling a bit more volume Our fire resistant wrap hole, so it looks very good for us for meeting our guidance for this year. That's fantastic. Appreciate the time as always, Eric. Thank you, Walter. Your next question comes from the line of Michael Tupholme with TD Securities. Your line is open. Thank you. Good afternoon. Good afternoon, Michael. Eric, the residential lumber business continues to exceed expectations, And you're now calling for very strong year over year sales growth in the 45% to 65% range for 2021. Certainly, it sounds like you expect growth to continue to remain strong in the Q2, but I'm wondering if you can talk a little bit about What you've built into the guidance or those expectations as it relates to residential lumber for the back half of this year? So you're exactly right, Michael. Our revised guidance is not considering Higher year over year pricing. And if you recall last year's trend, the first half of the year, I would say, had lower sales price on a work foot basis, and And we saw prices increase in the second half of the year. So most of the gains would come in the first half of the year. Mind you, after that, when we look at the second half of the year, that's where I guess our range comes more into play. And it will depend if lumber prices are going to subside to some extent or be maintained? Okay. So at the low end of your range, would that put you into A situation where your year over year growth organically in residential lumber turns negative in the Q3? Yes. It could slightly be negative, yes. Okay. Yes, a bit more towards the last quarter, obviously, where the prices were much higher than the Q3. Okay. Fair enough. Just trying to get a sense for yes, I mean, there's still a lot of uncertainty and we don't know what prices are going to go, but that's helpful. Thank you. On the utility pole side, it sounds like you're still fairly upbeat about the business. I'm just wondering with respect to the you saw some lower maintenance demand in the Q1 and part of that I guess was to the weather events in the U. S. S. O. P. Do you expect to see or have you already seen any kind of a pickup on the maintenance The demand side in the early part of the second quarter and does that do those weather issues in the Q1, do they create a situation where you could sort of have some cash activity in the Q2? Paul, no. So that is definitely adjusting in a sense to trend towards our guidance. What we saw in the Q1 is that with winter orders, intense winter conditions, we saw in this out. We're not necessarily pole events. We didn't see poles breaking, but power was out. So the maintenance crews were spending a lot of time reconnecting the grid and making sure that households And hospitals and domiciles got back the electricity at faster because that's a bit of the reason for that slowdown when we refer to the weather event in the Q1. Okay. And then just in terms of I'm assuming, is it fair to say you have now seen some Pick back up in that maintenance activity? Yes. Yes. The demand is adjusting back to our expectations and that's why we're comfortable Yes, guiding to the mid to high single digits for the year. Okay. And then just as far as the new credit facility for your U. S. Operations that you entered into subsequent to quarter end, aside from the repayment of Bridge Loan, what are the goals or the intended uses of that financing? And I mean, you can Let us know what the costs are there, but you did mention M and A as part of your prepared remarks. I'm not sure if this ties back into that. Well, so there are a few things, Mike. One, we do have part of our current facility, the $50,000,000 tranche that is firing in February 2022. So we're setting ourselves up to be able to accommodate that production. Secondly, when you look at our goal of wanting to sustain an EBITDA leverage from 2 to 2.5 times, If we consider that we potentially want to execute on M and A, we need some dry powder ahead of us to be able to execute as such. Okay. And then I guess just on that point, can you provide a little bit more of an update in terms of the M and A Pipeline, I mean, again, you did mention that you intend to be active this year, but any commentary around Timing and where you're at with some of the things you're pursuing? Yes. Well, so last time we spoke on this call, it was maybe about 6 weeks ago, I'd say. And so there's not much of an update with regards to M and A other than We'll keep progressing forward. These things are clearing up with regards to discussions with our targets. So we're moving on forward. We're definitely dedicated to expand our footprint and maintain our leadership position in the North American market. Okay. Thanks, Eric. My pleasure, Michael. Your next question comes from the line of Benoit Poirier with Desjardins Capital Markets. Your line is open. Yes. Good afternoon, everyone. Hello, Desjardins. Yes. Just to come back on the railway ties, could you talk about the continued pricing pressure experienced with the railway ties? And What is driving this pressure? So most of the pricing pressure is coming from the non Class I business. As we explained to some extent last year, we were very good last year in the back half of the year. As I explained, Sherry picked a bit of the orders where we wanted to consider ourselves trying to manage our margin best we could. Right now, what we're seeing is we saw a bit of a more aggressive pricing again in the 4th quarter. The orders we took in the 4th quarters were actually now So in the Q1, the first half of the year, it's a bit of a continued trend with regards to the pricing pressure. I think it's also related to availability of ties, which we're starting to see tighten up slightly because obviously Large demand for grade lumber and for pallet stuff, which is competing with the Centrum block for 5, Which is actually existing. I think a bit of tightening in the market will actually give us a chance to revisit pricing upwards, but that would most likely be in the second half of the year. Okay. Okay, that's great. And just for residential lumber, could you maybe break down the component between Pricing and volume and also maybe for the quarter, but also with respect to the 45% to 65%, And the mix overall in terms of pricing and volume? Yes. So for our Q1, The split is really 70% pricing, 30% volume. Our guidance right now is In better part related to pricing. Okay. Okay. That's great. And for the new credit So, Silvi, any thoughts about the interest rate, whether it's accretive or bit dilutive versus the previous terms, David? So, Vania, you want to take this one? You negotiated the agreement. I'll give you credit for doing a great job there. So, because it's, you know, it's Part of the U. S. Farm Credit System, the interest rates, even though they're pretty much Competitive with our current facility, we will benefit from patronage dividends. So overall, our pricing would be lower than what we And see what we currently have with our facilities. Okay. Okay. That's great color. And In terms of working cash for 2021, any color given that you're building up inventory for residential So, Lumber, what we could expect, let's say, working capital change for the full year at Sylvana? Yes. We're pretty much forecasting a similar trend as in Q4 of last year, Given the strong residential number demand, we expect that we're going to have to build up Our inventory is similar like we did last year in the 4th quarter at higher costs. So if we would have to sort of Yes. I would say that probably the buildup will be similar to Q4 of last year. Okay, okay, perfect. Okay, that's great. Thank you. Thank you, Your next Question comes from Hamir Patel with CIBC Capital Markets. Your line is open. Hi, good afternoon. Good afternoon, Hamir. I wanted to get your thoughts about the sort of Biden infrastructure plans, some of the proposals that are out there. What sort of the impacts And how meaningful do you think that could be for both Thai and coal demand? Well, It's a difficult question to answer, Hamir. What I've read so far, There's several areas in the current bill that offer opportunities for us. It does talk about rail track maintenance and upgrades. It does talk about construction of new roads and road repair. Often when your roads or highways are fixed, You can repost or either changed out or added in the case of new construction. There are discussions about bringing broadband to rural areas. There's also lots of thoughts or descriptions about encouraging green energy initiatives, which would obviously You would need some sort of electrical grid to bring the power into the network. So I see multiple aspects in the current bill where we could benefit from. Now we'll have to wait and see what the final bill looks like. I believe there's still a lot It should be done until we see a final bill, but I think it is most likely encouraging for our future business given The large presence that we have in both pies and coals, we should at one point benefit from it. Great. Thanks, Eric. That's helpful. And want to come back to M and A. I know in the past, Stella has spoken about potentially considering a sports Pillar to expand into, anything you could share there about where the Board is at in terms of that sort of process and if you have any thoughts you could share on potential markets or product categories that could be of interest? Well, certainly, I mean, I can't divulge any details because we're we are having discussions. The Board has Task me to come up with a strategic review for the next, let's say, 3 to 5 years as where we're going for core products. And then as I mentioned in my prepared remarks, we're also looking at how we could leverage our strength As a company, you may view our network or our customer base and so on to be able to see what could be a great fit for Stella Jones into those areas. So I can't answer specifically, but I'm definitely being asked to explore and see if there's any great ideas to keep growing Our business within our categories, but something also within adjacent fees of what we do currently. Okay, great. Thanks, Rick. Just the last question for me. The fire retardant wrap poles, How what's the proportion of your mix in poles do you expect that to be in 2021? Approximately 5% of overall sales. Okay. And where do you see that going? Is there a max that just given sort of weather constraints maybe or Mexico? Yes. I mean, 5 inches is our goal. I mean, I would say that this year, our expectation was for a full year of sales of that product to a certain number of customers. Had a bit of a slow start to the beginning of the year, but let's say using a 5% is good. We could revisit this question in future quarters as We're definitely going to start introducing this product in other regions of North America where forest fires Our regular event, but right now, we're sort of projecting it at a 5% level. Great. Thank you. That's all I have. Thank you, Hamir. Thank you very much. There are no further questions at this time. Mr. Vaishnold, I turn the call back over to you. Thank you, Greg, And thank you everyone for joining us for this call today. We look forward to speaking with you again at our next quarterly call. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.